The notice for next week’s Federal Energy Regulatory Commission (FERC) conference on the intersection of wholesale energy markets with state energy policies says that there is an “open question of how the competitive wholesale markets, particularly in states or regions that restructured their retail electricity service, can select resources of interest to state policy makers while preserving the benefits of regional markets.”
This is an intriguing understatement for a conference that provides at least a starting point for the hard discussion the energy sector must have about the need to catch wholesale market rules up with the reality of this country’s changing power generation mix.
How did we get here?
The states of wholesale energy market design and FERC, the federal agency that regulates that design, are in flux. Regional wholesale energy markets, intended to increase competition in the sale of energy and related services like capacity and reserves, were designed around the marginal cost of predictably dispatchable central station power plants with variable fuel costs.
During the several decades that most power plants exhibited these similar operating characteristics and natural gas prices were at least meaningful, coal and nuclear power plants proved successful in clearing markets to provide competitively priced energy. The last decade’s sustained plunge in natural gas prices, however, along with declining demand due to energy efficiency and an exponential increase in zero marginal cost wind and solar power plants coming online, and, to a lesser extent, the cost of environmental compliance for outdated fossil-fueled power plants, has dramatically altered the equation.
Coal and nuclear power plants that reliably cleared the markets have found themselves failing to recover costs, while natural gas rules the margin and wind and solar power and customers’ demand response contribute to lowering energy prices. The relatively rapid change has led to countless specific changes by regional market operators (buyer side mitigation battles, anyone?) trying to manage the transition as well as attempts by states like Maryland, New Jersey, and more recently, New York and Illinois, home to some of these failing power plants, to enact policies that protect their resources – with varying degrees of justified reliability and cost concerns.
Stepping back, it is fair to say that an increasingly severe disconnect exists between the services wholesale markets are designed to provide and the grid services necessary to reliably and cost-effectively support an electric grid increasingly powered by renewable energy resources. Determining and then monetizing the value of grid services necessary to support a renewables-dominated electric grid is critical to ensuring cost-effective reliability in our new world. (FERC and regional grid operators are by no means oblivious to this disconnect – next week’s conference is exhibit A, with B and C being efforts by regions like New England and PJM to get at the bigger market design issues, at least to the extent politically realistic.)
At the same time, pre- and post- presidential election events have FERC down to two commissioners, one short of quorum from a potential full slate of five. Acting Chairman LaFleur and Commissioner Honorable obviously recognize the urgency of the market reform need, but cannot act until at least one more Commissioner is appointed and confirmed.
It is at this crossroads from which the next stage of market reform must take form.
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